Trump’s Iran Sanctions Have A China Problem

By Zongyuan Zoe Liu, Project Syndicate | Sep 18, 2026

US President Donald Trump is trying to pressure the Iranian regime by isolating it from the dollar-based financial system. But because Iran’s oil trade largely moves through Chinese banks and renminbi-based networks, those sanctions increasingly depend on financial institutions beyond American control.

BEIJING—In late August, US Treasury Secretary Scott Bessent declared an “economic D-Day” against Iran, promising “the single greatest financial offensive ever marshaled against an adversary.” The D-Day analogy is an odd one for a campaign whose success ultimately depends on China, an American ally at Normandy but a strategic rival today.

For the Trump administration’s “zero-leakage” policy to succeed, foreign financial institutions would need to monitor and police their own customers. And there is no way to achieve the “total isolation” of the Iranian regime without Chinese banks doing much of the hard work of sanctions enforcement.

Before the closure of the Strait of Hormuz, the US Treasury estimated that China purchased roughly 90% of Iran’s oil exports. Years of sanctions have already pushed much of the Iranian oil trade into an alternative system capable of operating without the dollar, the SWIFT interbank payments platform, and the correspondent banks that have long given the United States its financial leverage.

Much of this trade moves through Iran’s rahbar shadow-banking system, which according to the Treasury processes “tens of billions of dollars” worth of trade each year, “much of it derived from Iran’s overseas sales of oil and petrochemicals.” Today, Iran settles those sales primarily in renminbi.

Secondary US sanctions have previously changed the behavior of major Chinese banks even when China officially rejected them. Within the first week of Russia’s invasion of Ukraine in February 2022, for example, the offshore units of the Industrial and Commercial Bank of China (ICBC) stopped issuing dollar-denominated letters of credit for purchases of physical Russian commodities. Renminbi-denominated credit lines remained available for some customers but required senior management approval. The Bank of China (BOC) restricted financing for Russian commodities, while its Singapore branch went even further and ceased financing transactions involving Russian companies and oil.

America’s Sanctions Blind Spot

But China’s largest banks—its policy banks and the “big four” state-owned commercial banks, the ICBC, the BOC, the China Construction Bank, and the Agricultural Bank of China—are not America’s hardest enforcement problem. Their global operations require them to maintain access to dollar liquidity and correspondent banking relationships, which are far more valuable than any business with sanctioned Iranian entities. This dependence on the global dollar system gives them powerful incentives to limit their exposure to US sanctions. As former Treasury Secretary Janet L. Yellen observed, China’s large banks “are not banks that we most need to worry about” as they “really, really value their correspondent-banking relations.”

The greater challenge lies deeper within the Chinese financial system, among thousands of smaller regional banks with far less exposure to the dollar-based system and therefore less to lose if that access is cut off. In 2023, the People’s Bank of China counted more than 3,800 urban and rural banks and credit cooperatives, in addition to private banks and other institutions. In 2024, as the US threatened Chinese banks with secondary sanctions, Russian companies increasingly turned to smaller regional institutions with minimal ties to Western markets.

The real question facing the Trump administration is whether it can compel or induce smaller Chinese banks to scrutinize customers and transactions deliberately structured to conceal Iranian connections—and refuse the business once they uncover them. Iran’s rahbars use foreign-exchange houses, layers of offshore shell companies, and bank accounts in the United Arab Emirates, Hong Kong, and Singapore to move oil proceeds on behalf of sanctioned Iranian entities.

Chinese buyers of Iranian crude, especially independent “teapot” refiners in Shandong, which have absorbed most of the sanctioned oil, do not need to send money to an Iranian bank. A buyer can simply pay an offshore front company in renminbi. The money can then be used to pay Chinese suppliers on Iran’s behalf or sent elsewhere.

On paper, the transaction may have no connection to Iran. To the Chinese bank processing the payment, it could look like an ordinary transfer from a Hong Kong trading firm to a company in Dubai. Internal records from the Iranian exchange house Radin, for example, identified dozens of China-based front companies maintaining accounts at Chinese banks. FinCEN has similarly documented transactions operated by Hong Kong-based shell companies that it linked to Iran’s shadow-banking network.

This makes compliance much harder. Instead of simply refusing to do business with sanctioned entities, banks now have to uncover hidden links to Iran in accounts and transactions where no Iranian name appears at all. That requires more than routine customer onboarding and sanctions-list screening. Banks must scrutinize beneficial ownership and counterparties more closely and examine the purpose of payments, and anti-money-laundering teams must devote resources to reviewing transaction documentation and looking for payment patterns indicating that seemingly ordinary transactions may actually be moving money for sanctioned Iranian entities.

The US Treasury is now explicitly pushing this investigative burden onto foreign banks. In April, the Office of Foreign Assets Control urged financial institutions to subject independent teapot oil refineries in China to enhanced due diligence and warned that the US government is prepared to use secondary sanctions against them. The Treasury has since made clear that its latest sanctions campaign, Operation Economic Outcast, could include cutting foreign banks off from the dollar-based system.

The Compliance Trap

In principle, Chinese law already requires banks to conduct “know your customer” verification and maintain financial-crime controls. In 2022, the Financial Action Task Force rated China’s anti-money-laundering regime as “largely compliant” with its due-diligence standards.

China has implemented additional measures since then. Its revised anti-money-laundering law, which took effect in January 2025, requires financial institutions to verify customers and beneficial owners, understand the nature of business relationships, and, in certain high-risk cases, investigate the source of funds and the purpose of transactions. Banks must also monitor customers and transactions and investigate activity that departs from established patterns. More detailed rules implemented in January 2026 allow banks to refuse transactions or terminate relationships when they cannot adequately resolve money-laundering concerns.

But anti-money-laundering compliance and US sanctions enforcement are not the same thing. Finding an Iranian connection may prompt a Chinese bank to look more closely at a transaction if there are signs of money laundering. It does not, however, mean that under Chinese law they must reject it just because the US has sanctioned one of the parties.

In some cases, Chinese regulations pull banks in the opposite direction. In May, the Chinese Ministry of Commerce (MOFCOM) issued a blocking order covering five independent Chinese refiners sanctioned by the US for purchasing Iranian oil. Four are smaller regional teapot refiners. The fifth, Hengli Petrochemical’s Dalian refinery, can process 400,000 barrels a day and belongs to the Hengli Group, a Fortune 500 company. It is the largest Chinese refiner sanctioned by the US so far.

MOFCOM’s order states that US sanctions against these five refiners “must not be recognized, implemented, or complied with.” Violations of the order can result in administrative penalties and expose banks and other companies to claims for damages in Chinese courts. A Chinese bank can still refuse to process a transaction because of money-laundering concerns or other compliance risks, but it cannot refuse a transaction or sever a relationship specifically to comply with the covered US sanctions without violating the order.

As the US extends secondary sanctions to cover more economically and politically significant Chinese entities, such blocking orders are likely to become more common. China now has a sophisticated legal and administrative apparatus that can make the extraterritorial application of US sanctions increasingly difficult—or, in some cases, moot.

This exposes a structural constraint on US sanctions power. Large state-owned Chinese banks have too much to lose if they are cut off from the dollar system. But US leverage weakens as transactions move to smaller banks with fewer ties to the US and Western financial markets.

The US government is thus left in the awkward position of asking Chinese banks to uncover hidden ties to sanctioned entities in Iran (or North Korea and Russia) and then act on those findings, even when that could put them at odds with Chinese law. Chinese banks are certainly willing to carry out the anti-money-laundering checks required by Chinese regulations, but they have little incentive to go looking for links to sanctioned entities when discovering them could create new legal problems.

In such circumstances, knowing less and maintaining plausible deniability is institutionally safer than knowing more. And unless Chinese banks closely police their own clients as payment networks adapt, sanctions will remain porous, with payments migrating to new shell companies and intermediaries.

China’s New Bargaining Chip

Despite having the tools to retaliate against new US sanctions, China has used them selectively. Since President Donald Trump restored “maximum pressure” on Iran in February 2025, US sanctions against Chinese entities have mostly targeted specific shadow-fleet vessels, independent refineries in Shandong Province, and shipping terminal operators (Hengli Petrochemical’s Dalian refinery, the only large integrated Chinese independent refiner sanctioned so far, remains the notable exception). China’s response has consisted mostly of formulaic Foreign Ministry statements rejecting the unilateral nature of US sanctions and pledging to protect Chinese companies and citizens.

MOFCOM’s May 2 blocking order remains the only consequential countermeasure, and it is narrow and targeted. Yet only days after it was issued, Chinese financial regulators reportedly instructed major Chinese banks to suspend new renminbi lending to the five sanctioned refiners while leaving existing credit lines in place.

These actions are not necessarily contradictory. China can reject the extraterritorial application of US sanctions while allowing major Chinese banks to protect themselves from the consequences. It has followed the same pattern since Operation Economic Outcast expanded secondary sanctions in August, criticizing the measures without imposing another Iran-related countermeasure.

The calculation could change if the US sanctioned a major Chinese bank or state-owned enterprise rather than another shell company, small bank, or teapot refiner. China’s largest financial institutions depend heavily on access to dollars. The US has far less leverage over smaller and less systemically important firms. This asymmetry makes an escalating spiral of US sanctions and Chinese countermeasures less likely.

The problem for the Trump administration is what happens as more transactions move beyond the institutions and payment channels most exposed to US pressure. At that point, effective enforcement increasingly requires cooperation from Chinese banks over which the US government has no authority.

A growing renminbi-based financial system does not make US sanctions ineffective, at least while major Chinese banks remain dependent on the global dollar-based system. But when non-dollar payments are routed through shadow intermediaries, they erode the two critical enforcement advantages on which US financial sanctions have traditionally relied: the visibility of transactions and leverage over the institutions that process them.

While the dollar system gives the US enormous financial power, American officials can no longer assume that the threat of being excluded from it will be enough to make foreign institutions comply with their dictates. As more of the actual enforcement takes place inside China’s domestic financial system, beyond the reach of American authorities, China may gain a new source of geopolitical leverage.

Expecting China to enforce US sanctions is unrealistic, but anti-money-laundering enforcement offers a more practical basis for cooperation. As US and Chinese officials discuss Iran and its financial ties to China ahead of Trump’s planned summit with Chinese President Xi Jinping in Washington, the US would have better luck pressing China to enforce its own anti-money-laundering rules against the opaque financial networks facilitating Iranian trade.

Zongyuan Zoe Liu, Senior Fellow for China Studies at the Council on Foreign Relations, is Adjunct Professor of International and Public Affairs at Columbia University’s School of International and Public Affairs and the author of Can BRICS De-dollarize the Global Financial System? (Cambridge University Press, 2022) and Sovereign Funds: How the Communist Party of China Finances Its Global Ambitions (Harvard University Press, 2023), which won the 2024 PROSE Award in Business, Finance, and Management. Her research focuses on international finance, sovereign wealth funds, industrial policies, and the geoeconomics of the energy transition.